Difference Between ITM, OTM, ATM in Call and Put Options

ITM, OTM, and ATM are all types of options. If you are in the options trading market, it is essential for you to understand these types and their differences. ATM refers to at-the-money, OTM means out-of-the-money, and ITM means in-the-money. The classification of options contracts as ATM, ITM, or OTM is dependent on the intrinsic value, which is the difference between the options contract’s strike price and the asset’s spot price.

This article will help you understand the differences between ATM, ITM, and OTM options in call options and put options.

• ITM options have intrinsic value, while ATM and OTM options do not, impacting their immediate profit potential.
• ITM options are lower-risk compared to the higher-risk nature of OTM options, which rely heavily on market volatility for profitability.
• ITM options are suitable for immediate profit potential, ATM options offer balanced risk and reward, while OTM options are high-risk, high-reward opportunities.

In options trading, call options are contracts that give you the opportunity, but not the obligation, to buy shares or stocks at the predetermined strike price.

Let us begin the discussion on options trading by understanding what ATM, ITM, and OTM mean for call options.

ITM call option

An ITM call option refers to a situation where the strike price of a call option is lower than the spot price of the underlying asset. In this situation, you will have an intrinsic value, which will be the difference between the above-mentioned spot price and strike price. ITM options have an intrinsic value as a central characteristic, as well as a time value.

ATM call option

The situation of the ATM call option happens when the option strike price and the underlying asset’s spot price are almost equal. ATM options do not have intrinsic value but do possess time value.

OTM call option

OTM call option situation arises when the call option’s strike price is higher than the underlying asset’s spot price. There is no intrinsic value in OTM call options but they do have time value.

In options trading, put options are chosen by traders who want to bet on the price of the underlying security to fall. With put options contracts, you gain the right, without the obligation, to sell the underlying asset’s specific quantity at a predetermined price before the expiry.

Now, with the call options clarified, let us understand what ATM, OTM, and ITM mean for put options.

ITM put option

An ITM put option is determined when the situation entails the put options’s strike price being higher than the underlying asset’s spot price. The ITM option has intrinsic and time value.

ATM put option

The ATM option situation consists of the option’s strike price being almost the same as the underlying asset’s spot price. This option does not have intrinsic value.

OTM put option

In put options, the option’s strike price is lesser than the underlying asset’s spot price. While these options lack intrinsic value, they do have time value.

Let us take an overview of the differences between OTM, ATM, and ITM options in options trading:                                                                           

Understanding the differences between ITM, ATM, and OTM options is crucial for anyone involved in options trading. Each type has unique characteristics, especially in terms of intrinsic value, profit potential, and risk level. ITM options are valuable immediately due to their intrinsic value, while ATM and OTM options depend more on time value and market shifts. Understanding these distinctions can enable you to make informed decisions, aligning your strategies with market conditions for optimised returns.